Africa’s broader growth story

The African continent has benefited from the surge in commodity prices in the past decade. Oil rose from less than $20 a barrel in 1999 to more than $145 in 2008. Prices for minerals, grain, and other raw materials also soared on rising global demand. Yet, the commodity boom explains only part of Africa’s growth, which is more than just a resource boom. Natural resources, and the related government spending they financed, generated just 32 percent of Africa’s Gross Domestic Product growth from 2000 through 2008.The remaining two-thirds came from other sectors, including wholesale and retail, transportation, telecommunications, and manufacturing . Economic growth accelerated across the continent, in 27 of its 30 largest economies.

Indeed, countries with and without significant resource exports had similar GDP growth rates.

Promising long-term growth prospects

A critical question is whether Africa’s surge represents a one-time event or an economic take-off. The continent’s growth also picked up during the oil boom of the 1970s but slowed sharply when oil and other commodity prices nosedived during the subsequent two decades. Today, individual African economies could suffer many disappointments and setbacks. While short-term risks remain, our analysis suggests that Africa has strong long-term growth prospects, propelled both by external trends in the global economy and internal changes in the continent’s societies and economies.

Widespread growth

Africa’s growth was widespread across sectors from 2002 to 2007. The key reasons behind this growth surge included government action to end armed conflicts, improve macroeconomic conditions, and undertake microeconomic reforms to create a better business climate. To start, several African countries halted their deadly hostilities, creating the political stability necessary to restart economic growth. Next, Africa’s economies grew healthier as governments reduced the average inflation rate from 22 percent in the 1990s to 8 percent after 2000. They trimmed their foreign debt by one-quarter and shrunk their budget deficits by two-thirds. Finally, African governments increasingly adopted policies to energize markets. They privatized state-owned enterprises, increased the openness of trade, lowered corporate taxes, strengthened regulatory and legal systems, and provided critical physical and social infrastructure. Nigeria privatized more than 116 enterprises between 1999 and 2006, for example, and Morocco and Egypt struck freetrade agreements with major export partners. Although the policies of many governments have a long way to go, these important first steps enabled a private business sector to emerge. Together, such structural changes helped fuel an African productivity revolution by helping companies to achieve greater economies of scale, increase investment, and become more competitive. After declining through the 1980s to 1990s, the continent’s productivity started growing again in 2000, averaging 2.7 percent since that year. These productivity gains occurred across countries and sectors. This growth acceleration has started to improve conditions for Africa’s people by reducing the poverty rate. But several measures of health and education have not improved as fast. To lift living standards more broadly, the continent must sustain or increase its recent pace of economic growth.

Global economic ties

Although Africa is more than a story about resources, it will continue to profit from rising global demand for oil, natural gas, minerals, food, arable land, and the like. MGI research finds that over the next decade, the world’s liquid-fuel consumption will increase by 25 percent—twice the pace of the 1990s. Projections of demand for many hard minerals show similar growth. Meanwhile, Africa boasts an abundance of riches: 10 percent of the world’s reserves of oil, 40 percent of its gold, and 80 to 90 percent of the chromium and the platinum metal group. Those are just the known reserves; no doubt more lies undiscovered. Demand for commodities is growing fastest in the world’s emerging economies, particularly in Asia and the Middle East. Despite longstanding commercial ties with Europe, Africa now conducts half its trade with developing economic regions. From 1990 through 2008, Asia’s share of African trade doubled, to 28 percent, while Western Europe’s portion shrank, to 28 percent, from 51 percent.

China, for example, has bid for access to ten million tons of copper and two million tons of cobalt in the Democratic Republic of the Congo in exchange for a $6 billion package of infrastructure investments, including mine improvements, roads, rail, hospitals, and schools.

This geographic shift has given rise to new forms of economic relationships, in which governments strike multiple long-term deals at once. China, for example, has bid for access to ten million tons of copper and two million tons of cobalt in the Democratic Republic of the Congo in exchange for a $6 billion package of infrastructure investments. India, Brazil, and Middle East economies are also forging new broad-based investment partnerships in Africa. The global race for commodities also gives African governments more bargaining power, so they are negotiating better deals that capture more value from their resources. Buyers are now willing to make up-front payments (in addition to resource extraction royalties) and to share management skills and technology. At the same time, Africa is gaining increased access to international capital. The annual flow of foreign direct investment into Africa increased from $9 billion in 2000 to $62 billion in 2008—relative to GDP. While Africa’s resource sectors have drawn the most new foreign capital, it has also flowed into tourism, textiles, construction, banking, and telecommunications, as well as a broad range of countries.

The rise of the African urban consumer

Africa’s long-term growth will increasingly reflect interrelated social and demographic changes creating new domestic engines of growth. Key among these will be urbanization, an expanding labor force, and the rise of the middle-class African consumer. In 1980, just 28 percent of Africans lived in cities which is now 40 percent of the continent’s one billion people.

Urban Africa

Africa is nearly as urbanized as China is and has as many cities of one million people as Europe does. To be sure, urbanization can breed misery if it creates slums. But in many African countries, urbanization is boosting productivity (which rises as workers move from agricultural work into urban jobs), demand, and investment. Companies achieve greater economies of scale by spreading their fixed costs over a larger customer base. And urbanization is spurring the construction of more roads, buildings, water systems, and similar projects. Since 2000, Africa’s annual private infrastructure investments have tripled, averaging $19 billion from 2006 to 2008. Meanwhile, Africa’s labor force is expanding, in contrast to what’s happening in much of the rest of the world. The continent has more than 500 million people of working age. By 2040, their number is projected to exceed 1.1 billion—more than in China or India— lifting GDP growth. If Africa can provide its young people with the education and skills they need, this large workforce could become a significant source of rising global consumption and production. Education is a major challenge, so educating Africa’s young has to be one of the highest priorities for public policy across the continent.

Finally, many Africans are joining the ranks of the world’s consumers. In 2000, roughly 59 million households on the continent had $5,000 or more4in income—above which they start spending roughly half of it on nonfood items. By 2014, the number of such households could reach 106 million. Africa already has more middle-class households (defined as those with incomes of $20,000 or above) than India. Africa’s rising consumption will create more demand for local products, sparking a cycle of increasing domestic growth.

Africa’s diverse growth paths

While Africa’s collective long-term prospects are strong, the growth trajectories of its individual countries will differ. Economists have traditionally grouped them by region, language, or income level. We take another approach, classifying 26 of the continent’s largest countries5according to their levels of economic diversification and exports per capita. This approach highlights progress toward two related objectives:

1. Diversifying the economy. In the shift from agrarian to urban economies, multiple sectors contribute to growth. The share of GDP contributed by agriculture and natural resources shrinks with the expansion of the manufacturing and service sectors, which create jobs and lift incomes, raising domestic demand. On average, each 15 percent increase in manufacturing and services as a portion of GDP is associated with a doubling of income per capita.

2. Boosting exports to finance investment. Emerging markets require large investments to build a modern economy’s infrastructure. Exports are the primary means to earn the hard currency for imported capital goods, which in Africa amount to roughly half of all investment. This is not to say that African countries must follow an Asian model of export-led growth and trade surpluses, but they do need exports to finance the investments required to diversify.

History shows that as countries develop, they move closer to achieving both of these objectives. Most African countries today fall into one of four broad clusters: diversified economies, oil exporters, transition economies, or pre-transition economies. Although the countries within each segment differ in many ways, their economic structures share broad similarities. Our framework is useful for understanding how growth opportunities and challenges vary across a heterogeneous continent. Although imperfect, this framework can guide business leaders and investors as they develop strategies for Africa and can provide new perspectives for its policy makers.